The policy of the government and the State Bank of Vietnam (SBV) is to direct credit flows into priority areas, limit credit growth in high-risk sectors, and promote bad debt handling.

Promoting bad debt handling

At the Conference on Deployment of Banking Industry Tasks in HCM City for the year of 2019 on January 23, deputy Governor of SBV Dao Minh Tu said that bad debts have been partially dealt with. However, the policy of the government and SBV is to continue to direct credit institutions to accelerate the handling of bad debts and to prevent its growth.

Earlier this year, the government issued Resolution No. 01/NQ-CP on major tasks and solutions to carry out the Socio-Economic Development Plan. In particular, with the banking sector, the government required a solution to increase capital for commercial banks. At the same time, the policy makers expected to reduce the internal NPL ratio to below 2 percent and the NPL and potential NPL to bad debts ratio (including bad debts, bad debts sold to Vietnam Asset Management Company (VAMC) not yet processed and debts with re-structured repayment period which potentially become bad debt) to below 5 percent, much lower than now.

Related to bad debt, 2019 is the last year of the five-year roadmap of bad debts that banks sold to VAMC. Accordingly, bad debts will return to the banks, if it has not been processed. So far, the whole system has only five banks that have completed VAMC bond settlement, including:

In order to limit bad debts and to control credit quality, the policy of the government and SBV is to direct credit flow into priority sectors and tighten credit growth in high-risk areas, including real estate. That was the reason that HCM City Real Estate Association (HoReA) repeatedly petitioned SBV to extend for additional one-year period to reduce the short-term capital for medium and long-term loans ratio from 45 percent to 40 percent, which was not approved by SBV then.

Dao Minh Tu also said that over the past period, there had been many petitions from real estate associations on the possibility of credit expansion in this area, but government and SBV still kept their policy unchanged.

According to the deputy Governor, the fact that bad debt increased in previous years has left significant consequences for the banking industry, partly due to strong lending of some banks to real estate. Many debts related to real estate collateral are not able to settle and recover debts.

In addition, another activity that needs strict control is consumer credit. Consumer credit tends to climb in recent years. According to statistics of SBV- HCM City branch, credit balance of the segment in the city accounted for 12.73 percent, 82.9 percent and 18.36 percent of the total credit balance in 2015, 2016 and 2017 respectively.

Consumer credit continued to grow noticeably last year. The management of SBV-HCM City branch emphasized that it was necessary to promote the positive side of this credit activity, but had to ensure risk control, debt recovery methods, and debt management and limit arising problems related to interest rates.

In addition, according to the provisions of Circular 41/2016/ TT-NHNN, the capital adequacy ratio (CAR) is expected to decrease from nine per cent to eight percent complying with Basel II standards, effective from January 1, 2020. Although CA decreases, conditions in Basel II are stricter, related to total assets, interest rate risks, market risks and operational risks.

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